Mortgage Interest Deduction Vital to Housing Market
In recent years, the mortgage interest deduction has come under attack.
Palm Coast, FL – November 19, 2010 – The home mortgage interest deduction saves the average home owner thousands of dollars at tax time, supports home values at the community level, and helps American home buyers get into their first house.
How the deduction works
In general, any home owners who pay U.S. taxes and who itemize their taxes can deduct mortgage interest attributable to primary residence and second-home debt totaling $1 million, and interest paid on home equity debt of as much as $100,000.
Mortgage interest deduction threatened
In recent years, the mortgage interest deduction has come under attack. Among the suggestions for cutting it back to deal with the deficit:
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Reduce the mortgage interest deduction for upper-income taxpayers—they’d only receive 28 cents on the dollar, even if they’re in a 33% or 35% tax bracket and can now deduct 33 or 35 cents on the dollar.
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Reduce the $1 million cap by $100,000 a year.
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Change the mortgage interest deduction to a 15% tax credit.
In the past, members of Congress have suggested other mechanisms for eliminating or limiting the mortgage interest deduction. None of those has ever gained traction.
Arguments against mortgage interest deduction
Arguments against the mortgage interest deduction center on who benefits and whether the government should support home ownership. They say:
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It primarily helps the wealthy, since high-income taxpayers are more likely to itemize their deductions and to own homes. About 90% of taxpayers earning more than $100,000 itemize, while only 18% of those earning less than $50,000 follow suit, the Tax Foundation estimates.
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Taxpayers who don’t itemize deductions get to use the “standard deduction.” They do that because it gives them a bigger tax break than itemizing to use the mortgage interest deduction.
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Ending or reducing the mortgage interest deduction would create a deep source of money for reducing the budget deficit.
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In the aftermath of the mortgage crisis, the U.S. needs to rethink its favored tax treatment of home ownership.
Arguments for mortgage interest deduction
Those who favor keeping the mortgage interest deduction say it helps middle-income families, who already pay nearly all U.S. income taxes. Plus, getting rid of the mortgage interest deduction would hurt home prices.
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More than 60% of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000, estimates the NATIONAL ASSOCIATION OF REALTORS®.
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A disproportionate number of those high-income taxpayers live in areas where housing is especially expensive, such as California and New York. In high-cost housing markets, lowering the $1 million cap would add a tax burden on families who already must pay high prices for homes.
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Home owners already pay 80% to 90% of the income tax in our country, and among those who claim the mortgage interest deduction, almost two-thirds are middle-income earners, says NAR Chief Economist Lawrence Yun. So home owners, who are the pillars of federal income tax revenue, would have to shoulder a bigger tax burden.
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Home values could fall 15%, says Yun, as buyers discount the value of the mortgage interest deduction in their purchase offers.
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It’s faulty to link the mortgage meltdown to the country’s support for home ownership. The meltdown is rooted in lax underwriting and faulty ratings by credit rating agencies of the securities backed by the mortgage, says Yun.
Protecting the deduction promotes housing. In supporting the mortgage interest deduction, you help ensure that tomorrow’s families can follow the same path to home ownership that so many of us have already traveled.
Dona DeZube, HouseLogic’s News Editor, has been writing about real estate for over two decades. She lives in a suburban Baltimore 1970s rancher on a 3-acre lot shared with possums, raccoons, foxes, a herd of deer, and her blue-tick hound.
Source: HouseLogic – Published: October 29, 2010
Fair?
The Mortgage Interest Deduction is good for me as a Realtor. All things considered is it really fair to other industries? In a time when the National Debt is strangling our Country wouldn’t it be really patriotic to put aside self serving deductions. We should pay more taxes and pay off our debt, you are living in a fantasy world if you think; cutting spending will solve the whole problem.
Tax Code
The tax code in America is extremely complicated. It was written by government beaurocrats. They wrote the mortgage interest deduction into this complex tax code years ago. There are thousands of different tax laws in America. Most informed people understand and agree that home ownership is good for local communities. Particularly homes which are owner occupied. Presumably, this idea was accepted by the government when the mortgage interest deduction was written into the tax code by them. Now, many hard working Americans who are, in my opinion, very over taxed by these Washington beaurocrats, do claim this legal deduction. There are dozens of different deductions available. But, the only people with any use at all for any income tax deduction are people who are actually paying income tax. Speaking as one of them I would just like to say that I am taxed on everything I buy, everything I sell, everything I earn, everything I spend and everything I own. On multiple levels. Yet, the government still runs a deficit. I do not claim this particular deduction because I do not have a mortgage on my principle residence. I have chosen to live below my means for the past 30 plus years, right here in America. However I am amazed that any politician would seriously consider for one second doing ANYTHING that would further erode all home prices in America. This would have a negative impact on every American. Lastly I would like to point out that there is no law that forces any American to claim any particular income tax deduction. Therefore if someone like Denis wants to be "really patriotic" and "pay more taxes" he certainly has the right to do so, with his own money.